23 February 2020

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Money Matters-Tax Saving Tips

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There is a humorous statement made by Herman Wouk about ‘tax saving’ - “Income tax returns are the most imaginative fiction being written today”. March is a month for tax savers and we need to act swiftly before the deadline.

Tax Saving means reducing the payments made against income tax while filing the yearly returns. The Income Tax department has formulated an Income Tax Act which has several provisions for a person to save the payable tax amount. Various sections of Income Tax Act, 1961, like 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80G, 80GG sets out a number of tax-saving options for tax payers.

To put it simple, we can broadly divide the tax-saving avenues into two categories: ‘Expenditure Related Deductions’ and ‘Investment Related Deductions’. The first category lies scattered in different sections of Income Tax Act, and in this we can claim tax deduction for certain business expenses, certain personal expenses like tuition fees, medical treatments, rent and home loan repayment made in a financial year.

The second option falling mainly under Section 80C is tax-saving through several investment instruments, where the amount invested in a particular financial year can be claimed for deduction subject to certain limits.

Before turning to make any investment options to get tax benefit under section 80C, you should first ensure that you had availed the applicable concessions or deduction for the expenditures incurred by you. Business owners should not overlook the applicable concessions or fail to keep adequate records that will back up your write-offs which will take away your opportunities to cut your tax bill.

Tax Saving Against Expenditure

Business Expenses

All business related expenses can be claimed tax exemption under the head business expenses. Many expenses including rent of office/ shop building, office maintenance and administrative expenses, travel costs, communication costs (telephone, internet), business meeting expenses etc can be claimed as expenses.

For being deductible, expenses must be “ordinary and necessary”, which implies that it should be common and accepted as well as appropriate and helpful in your business. One can also claim depreciation benefits on capital expenditures; on work related assets like computers and other electronic equipments, office furniture and vehicles. Bad business debts may also be written off as ‘losses and it can be carried forward for 8 years.

Many legitimate business expenses can be written off like this to reduce the amount of GTI (Gross Total Income) on which you need to pay taxes. You can as well purchase items in advance before the year end, that your business would require in the immediate future, to maximize deductions for the current year. Suppose, if you can see a need for goods and services required in the first quarter of the new year, buy them now, if cash flow permits and consider those purchases as expenses.

Similarly, if you use your home for business purposes, t you can claim a deduction to cover part of your home running costs. Also, you can look at options of distributing income within the family and by using the HUF structure. For example, if your spouse or any immediate members of your family is helping you out in your business you can consider whether to set them into your pay roll and the payment of their salary is in turn a business expense.

Tuition Fees and Educational Loans: Expenses incurred on children’s full time education in India are eligible for deduction under section 80C ( for two children ). Under section 80E the interest portion paid on EMI of children’s education loans can be claimed for deduction for a maximum period of 8 years, subject to specified courses such as management, engineering and medicine.

Repayment of Home Loans: The EMI that you pay against your home loan is deductible to a certain limit for both principal and interest portions. Under Section 80C, the principal part is deductible for payment up to Rs.1 lakh, while there is a separate deduction of Rs.1.5 lakhs for interest portion under Section 24(b) of Income tax Act. This is applicable for self-occupied properties only and for residence constructed within three financial years after the loan is taken.

If a person buys a house and sells it within the same year or before three years, he is liable to pay short term capital gains tax. If the sale had taken place after three years, needs to pay long term capital gains tax. Long-term capital gains are exempted from tax if the profit amount is invested in capital gains tax-saving bonds as detailed under Section 54.

For let out properties, the entire interest paid will be deductible under section 24 of Income Tax Act. However, the rental income is to be shown and 30% of rent received and the taxes paid are available for deduction.

Purchase of House Property: Stamp duty, registration fees, and other expenses incurred for the purpose of purchase of house property are also entitled for section 80C deduction.

Donations Subject to the certain limits as per section, different donations made by the business owner to specified funds/institutions are eligible for tax benefits under Section 80G.Standard deduction limits vary from 50% to 100%

Medical treatment of disabled dependent
A fixed deduction of Rs 50,000 (irrespective of the actual expenses) under section 80DD is allowed, if you happen to incur any expenditure on the medical treatment including nursing, training & rehabilitation of any handicapped dependent. For severe disability, the amount of deduction available up to Rs 1,00,000

Rent paid under section 80GG

If you’re either self-employed or employed but not getting any HRA from your employer, you can get a deduction under section 80GG for the rent paid by you for your housing property. Here the maximum amount allowed is only Rs 2,000 per month (ie, Rs 24.000 annually) and is subject to certain conditions.

All necessary documents pertaining to expenses like vouchers/bills, bills of capital expenditures are required to support expenses and hence book keeping is vital for tax purpose.

Investment Options

Various investment options available for tax saving under Section 80C can be divided into three categories: Equity instruments, Debt Instruments and Life Insurance and Pension Plans.

ELSS (Equity Linked Savings Scheme) is considered as the best option under 80C section. It is a mutual fund scheme with complete equity exposure and therefore has a potential to deliver the best returns.
Options such as Public provident Fund (PPF), NSC (National Savings Certificates), Five Year Post Office Term Deposit, Five Year Tax-Saving FD’s of banks, NABARAD (National Bank for Agriculture and Rural Development) Rural Bonds etc comes under Debt Instruments

Life Insurance is the most popular investment avenue among all the tax-saving instruments. A variable return instrument available under section 80C is pension plan of mutual funds. There are only two such plans available–Templeton India Pension Plan (TIPP) and UTI Retirement Benefit Pension Plan (UTI-RBP). These are open-ended debt-oriented mutual fund schemes with a maximum exposure of 40% to equities. However, invest in them only if can spare funds for the long term because premature exit is very costly.

Contribution towards pension plans offered by insurance companies also qualifies tax benefit under section 80CCC. However, the aggregate deduction allowed under section 80C and section 80CCC can’t exceed Rs 1 lakh.

Medical insurance or Mediclaim Policies claim deduction upto Rs 30,000 under Section 80D . This deduction is available for premium paid on medical insurance for oneself, spouse, parents and children. This deduction is additional to Rs.1,00,000 savings. An additional deduction of upto Rs15,000 pa is allowed for premium payment made for parents. In case the parents are senior citizens, then the maximum deduction allowed is Rs 20,000 pa.

Remember,under Section 80C tax payers can invest upto Rs 1 lakh and save upto Rs 30,000 tax in a financial year. That is, if taxable income was Rs 5 lakh and you put away Rs 1 lakh, you will now pay tax on only Rs 4 lakh. You can avail 80C benefits by investing in multiple products or claiming deductions under various heads, but subject to the above limit..

Points to Ponder

Consider tax plan as an integral part of your financial plan.To avail maximum tax deduction, you must plan your savings, purchases and investments well. Do not overlook investments as mere tools to save tax.Never postpone your tax planning till the end of the financial year
It is a general convention to postpone tax planning to the year ending. Prepare a tax savings plan in the very beginning of the financial year itself, by making a rough estimate of your income and savings.

Don’t exceed the limit of Rs 1 lakh under Section 80C
Most of us never keep in mind the ceiling of 1 lakh while making investments for the purpose of claiming tax deduction. But any amount invested over and above the maximum limit under section 80C unnecessarily gets blocked without providing any tax benefits.
Choose investments wisely

Just because making investments in eligible instruments save taxes under section 80C, it should not be a good enough reason to choose an investment. One has to keep in mind various considerations such as the time-horizon, lock in period, risk and return factor, taxability of returns and cash flow needs. Never mix your tax planning and insurance planning. Separate your insurance needs from your tax savings and investment needs. Give priority to tax saving avenues that have the one time payment option and avoid large commitments if your income is irregular.

Update Your Accounting: Ensure that your books are up-to-date and accurate. Always keep a track of all expense related receipts, bills and vouchers.

The goal of tax planning is to reduce your tax liability. A smarter approach is required to become proactive and integrate your tax and investment planning.

Reference  http://www.incometaxindia.gov.in

Last Updated ( Monday, 05 July 2010 16:44 )  

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